5/21/2009 @ 7:20PM

Every Village, Every Home

Most motor vehicle makers are in sorry shape these days. But not this little outfit.

What Pawan Munjal has been up to lately could raise a lot of eyebrows, given the current condition of global capitalism. He’s bestowing general pay raises while releasing several new products, with a promotional budget to match.

The Indian company he runs, Hero
Honda
Motors, is also doing something a little shocking: It boosted sales of its motorcycles by 12% in the latest fiscal year through March–to $2.7 billion–and enjoyed a 32% gain in net income, to $257 million. Shareholders, who have seen their stock rise 50% this year, are hardly in a mood to question their chief executive’s moves.

India’s leading maker of motorbikes, the country’s most popular form of personal transport, Hero Honda is a quarter-century-old pairing of the Munjal family’s Hero Group and Honda Motor. Each has 26%, with the remaining 48% held by outside investors. These days Honda has a particular reason to be grateful for the link: It has suffered a 77% earnings plunge in a brutal auto market.

Having sold 3.7 million vehicles for the fiscal year, mostly motorcycles, Hero Honda widened its lead over rival Bajaj Auto and took a 57% share of India’s motorcycle market. “These numbers are mind-boggling, even for us!” declares Pawan. “What’s the secret? A lot of hard work and a little bit of luck, I guess, can create magic,” he says over lunch at Hero Honda’s factory in Gurgaon, on the outskirts of New Delhi. The magic includes the launching of nine models and will finance the average 8% pay hike just given and the all-expenses-paid trek to Macau and Hong Kong that the 200 best dealers will get in July.

Producing a motorcycle every 18 seconds, the Gurgaon factory (Hero Honda has two others) is the epitome of Japanese efficiency seamlessly transplanted into an Indian setting. Golf carts take visitors around the impeccably landscaped 70-acre site. A factory supervisor, leading a tour of the plant, points to the robots manning the welding line. The shop floor, he boasts, is “Honda clean.”

In what is the world’s second-largest two-wheeler market, after China, Hero Honda has held the top slot for eight years now. The Splendor, its mainstay bike, priced at $800, dominates the 100cc motorcycle segment, a category that accounts for two-thirds of all two-wheelers. More than a million Splendors are bought yearly, making it the world’s largest-selling motorcycle.

Auto analysts say Hero Honda’s success formula combines Honda’s engineering muscle with the Munjals’ market savvy, including a knack for reaching customers in the countryside–which in India, as in China, is proving to be a source of growth in the current slowdown.

Pawan’s father and Hero Honda Chairman Brijmohan Lall Munjal, 85, insists that the rural touch is nothing new. Hero was founded by him and his three brothers as a trader of bicycle parts in what is now Pakistan. When the group graduated to making bicycles, the bulk of its sales were in rural India. “We simply transferred that same approach to motorcycles,” he says.

By reading the market correctly, Hero Honda was able to finally topple long-standing scooter king Bajaj in 2001. To recover lost ground, Bajaj drew on technology from Kawasaki and jazzed up its portfolio, emphasizing premium motorcycles. For a while it looked as if a newly revved-up Bajaj would reclaim the crown.

But the downturn played to Hero Honda’s advantage. “Bajaj’s strategy of moving away from the lower segment to concentrate on high-end bikes backfired when the economic cycle turned and consumers got jittery. Hero Honda seems to have all the right products for recessionary times,” observes V.G. Ramakrishnan, senior director for automotive and transportation at consulting firm Frost & Sullivan India. It also helps that Indian bikers have come to regard Hero Honda bikes as the most fuel-efficient in the market.

The beginning of a credit squeeze that caused interest rates to soar led to a decline in the two-wheeler market in the year to March 2008. Hero Honda itself saw growth turning flat. Noting that sales were slowing mainly in big cities, Pawan figured it would be better off chasing hinterland customers.

Hero Honda already had a rural presence, but to tap into it with greater vigor he set up a separate sales division within the company with the mandate to reach “every village, every home.” Today company dealers have a field force of 500 rural sales executives.

It was a timely move. Although Indian agricultural growth remains at only 3%, a loan waiver in last year’s federal budget has put more cash in farmers’ hands. Hero Honda’s salespeople are trawling the smallest of villages for potential buyers. One important stop is Mansar Kheri, near the pink city of Jaipur in the desert state of Rajasthan. Its population of 3,300 includes 300 Hero Honda bike owners. Among them is former village chief Tejaram Mungena, a 52-year-old farmer. His family owns four.

To make scarce credit available to customers like Mungena is a challenge. Hero Honda’s solution is to partner with banks and finance companies to conduct frequent loan “fairs.” So far, so good. Rural sales contribute 40% to Hero Honda’s overall total, up from 35% in 2007. Pawan plans to add 600 more sales points this year to the existing 3,500. Rural markets, he reckons, will account for half of all sales within a couple of years.

The magnitude of the recession is such that even mighty
Toyota
is scrambling to cut costs. This smaller venture proves that there is room at the bottom.

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